Bad faith and the banking crisis

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It’s deeply satisfying to see the Tory leader excoriating bankers for their obscene bonuses, but there’s something rather embarrassingly closer to home here — as John Gapper points out.

There is no question that professionals of many nationalities – bankers, financiers, estate agents and regulators – behaved badly. They got paid a lot of money and wilfully loosened credit restrictions to keep house prices rising and bonuses flowing. Many of them, although far from all, were American.

But I would like to propose another culprit for the difficulty that many economies are in: you and I. We home buyers and mortgage borrowers share the blame, whether we are American, British or Icelandic.

Take nationality first. A year ago, when the US subprime mortgage debacle was evident but the British housing market was still doing well, I took a trip to London from my home in New York. On a visit to friends in west London, I was struck by the number of houses in their street with “To Let” boards outside.

At the time, there was a lot of talk about how the UK housing market differed from that of the US because it was a small island with a limited housing stock, there was no equivalent of subprime lending and so on. But those “To Let” boards said something different to me.

They showed that cheap debt and rising asset prices had led to housing speculation all over the world; it just took different forms. In wide, flat Florida it created sprawls of condominium apartments; in densely packed UK cities it generated a rush into buy-to-let properties. For subprime mortgages in the US, read “self-certified” UK loans…

I’m a conservative about money and so have been watching what’s been going on for the last decade with mounting disbelief — in this country and in Ireland. The Buy-to-Let racket in the UK was particularly screwy. There was a time, for example, when owners of such properties weren’t particularly bothered if they didn’t have tenants because their value was escalating so quickly that the rent was just icing on the cake. One didn’t need to be a rocket scientist to realise that this was nuts.

Fuchsia

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In our garden, this morning. Anecdotal research suggests that eight out of ten people spell the name of the plant wrongly. (Confession: I did for years!)

Don’t worry, we can always lease Heathrow to the Russians…

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The headline is from Willem Buiter’s blog.

The government of Iceland is using the threat of a €4 bn loan from Russia in exchange for a 99-year lease on the airport at Keflavik – a former American air base – as leverage to obtain financial support from the West. This is high-stakes poker -not without risk to Iceland, if their bluff is called. I would have securitised the future revenues from hydro and geo-thermal power generation before bringing on the Red Army. It does show, however, that there may be more collateralisable assets around for governments to draw on that one might have thought. Good news for Chancellor Darling.

Buiten’s reasoning (in another post to his excellent blog) is:

A government should only nationalise a bank (let alone most of its banking sector) if it has the fiscal strength to support the bank (or its banking sector). If it does not have the fiscal resources, now and in the future, to restore the banks to solvency, a private sector insolvency problem is transformed into a government insolvency problem. On the whole, the consequences of state default are more serious for the residents of a country than the consequences of a private bank default.

If the banks in question have a large amount of foreign currency debt, maintaining government solvency when the government tries to make all the banks’ creditors whole, requires two distinct resource transfers: an internal fiscal transfer, through spending cuts or tax increases from the domestic private sector to the government, and an external transfer through a larger primary surplus in the balance of payments accounts. Such an external transfer generally requires a depreciation of the real exchange rate and a worsening of the country’s external terms of trade.

Questions for McCain

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Here’s what Joe Stiglitz would like to ask in tonight’s ‘debate’:

1. When the current bailout of Wall Street fails to turn around the economy and reinvigorate credit markets, will you propose another one? How large should it be? Henry Paulson and Ben Bernanke have said what is needed is a restoration of confidence in the economy. But won’t the failure of this bailout destroy confidence, with disastrous consequences — as happened in Indonesia and other East Asian countries when similar bailouts failed 10 years ago?

2. More than a million people have lost their homes in the past two years. A million more are expected to lose their homes in the next 12 months or so. Do you support a more direct program of relief for homeowners? The government pays more of the mortgage costs of rich homeowners, through larger tax deductions, than of poorer homeowners. What would you do to correct this injustice?

3. President Bush pushed tougher bankruptcy laws that were supposed to reduce bankruptcy and lower lending costs. But the new laws made it more difficult for ordinary Americans to discharge their debts, and encouraged reckless lending on the part of lenders, who thought they could more easily force poor borrowers to repay. Would you make any changes in the bankruptcy laws? Currently, it is more difficult to restructure a mortgage on a primary residence than other debts. Do you support bankruptcy reforms that would make it easier for people to stay in their homes?

Personally, I like to put these to Sarah Palin.

Vista, the “unqualified success”

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Since (we updated it), I’d also refer to Vista as an unqualified success. It doesn’t mean that people aren’t still picking on it, but we’ve sold 180 million copies, something like that, of Vista. The quality, the compatibility (and) particularly from the consumer market, the level of acceptance — I’d call it an unqualified success, over the last six months or so.

Steve Ballmer, in an interview. But what we really want to know — and what Microsoft knows but won’t divulge, thought they know the number — is how many of those Vista copies have been actually activated. I know lots of people who bought laptops with Vista but who paid for the ‘downgrade’ to XP. Each laptop counts as a Vista ‘sale’, but not as a copy in actual use.

Prius plug-in

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Hmmm… Here’s a supplier (based in California) who will adapt my Prius to recharge from the mains. $5,000 plus shipping and installation. Bet it voids the warranty. I think I’ll wait for Prius v2.0.

Markets down, online lingerie sales up

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There’s a silver lining in every cloud.

Froggybank.co.uk, an online shopping network of 180 websites, said it had analysed the spending habits of its half a million members for the past three months, only to discover that underwear sales, far from being pulled down by the economic crisis had risen two per cent. Or, in other words, when people think “credit crunch”, they think “pants!”

More on the Chinese backdoor in Skype

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From Technology Review…

Skype has previously acknowledged that its Chinese partner, TOM Online, blocks chat messages containing certain politically sensitive keywords. The new findings, however, reveal a level of surveillance that goes far beyond this.

Nart Villeneuve, a research fellow at the Citizen Lab at the University of Toronto’s Munk Centre for International Studies, uncovered the surveillance scheme by examining the behavior of the TOM-Skype client application. He used an application called Wireshark, which analyzes traffic sent over a computer network, to see what happens when different words are sent via chat using the software. Villeneuve discovered that an encrypted message was automatically sent by the client over the Internet when some words were entered. Following this encrypted packet across the Net, Villeneuve uncovered a directory of files on an open Web server. Not only was the directory publicly accessible, but the data within it could be unlocked using a password found in the same folder. Within these files were more than a million chat messages dating from August and September 2008.

Villeneuve used machine translation to convert the files he found from Chinese into English, and he analyzed the contents to determine likely trigger words. The list he came up with includes obscenities and politically sensitive words and phrases such as “Falun Gong,” “democracy,” and “Tibet.” But Villeneuve also found evidence that completely innocuous messages–one, for example, contained nothing more than a smiley face–were logged. This suggests that certain users were targeted for monitoring, he says.

$5,000 for your genome

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From Technology Review…

Starting next spring, a complete human-genome sequence can be ordered for just $5,000, thanks to a new sequencing service announced by Complete Genomics, a startup based in Mountain View, CA. The stunning price drop–sequencing currently costs approximately 20 times that amount–could completely change the way that human-genomics research is done and open up new possibilities in personalized medicine. Researchers say that a $5,000 genome would enable new studies to identify rare genetic variants linked to common diseases, and it could open up the sequencing market to diagnostic and pharmaceutical companies, making genome sequencing a routine part of clinical drug testing.

Complete Genomics, which has received $46 million in venture funding to date and has largely stayed under the radar, plans to launch with a bang and anticipates the capacity to sequence 1,000 genomes in 2009 and 20,000 in 2010. That would represent a massive jump: with a price tag of $100,000 to $1 million over the past two years, only a handful of human genomes have been sequenced to date.

Apart from anything else, this is an illustration of what Moore’s Law can do.